A promissory note, while legal and binding, isn’t a guarantee that the funds will ultimately be repaid. A party’s financial situation, which may be strong at the time the note is granted, can deteriorate to a point where you will have difficulty collecting the funds. If the loan is secured by a form of collateral, you can exercise your legal right to seize those assets. However, an unsecured promissory note offers no collateral as a fallback if the funds go uncollected.
The first step when the promissory note goes past due is to send the borrower notice of non-payment. The formal letter should indicate the name of the borrower, the date of the note and the amount and date of the payment due. Give the borrower a set time frame, such as 30 days, to make a payment to bring the note current. Inform him that if he doesn’t pay, you will pursue your rights as outlined in the original promissory note.
When the promissory note goes unpaid, you may consider engaging the services of a collection agency. On one hand, a collection agency is run by debt recovery professionals who are up-to-date on the laws and regulations as dictated by the Fair Lending Act. If you are inexperienced in debt collection, you must be very careful not to violate the borrower’s rights, or you can put yourself in a disadvantageous legal position. On the other hand, while a collection agency will be thorough, there isn’t a guarantee that it will be successful in collecting the funds.
If the deadline from your notice expires and the borrower still has not made arrangements to pay the note, file a petition with the courts to obtain a judgment in your favor. The judgment will be enforced by the courts and will appear on the borrower’s credit report until after it is satisfied. If the borrower has the money but just isn’t paying, the legal action may be the incentive to abide by the terms of the note. If not, he can face wage garnishment, where the judge requires the borrower’s employer to pay a portion of his salary to you as payment for the obligation
If you don’t want to move ahead with wage garnishment, and all other avenues to collect the debt have been exhausted, your last option is to sell the promissory note. There are lenders that purchase delinquent promissory notes, but they do so at much less than the full value of the loan. You will take a significant loss if you opt for this option, so it should only be a last resort.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.